Ryanair Limited. Response to. Consultation on the Decisions of the 2010 Aviation Appeal Panel CP1/2010

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2 Ryanair Limited Response to Consultation on the Decisions of the 2010 Aviation Appeal Panel CP1/ June 2010

3 Response on behalf of Ryanair Limited to the Consultation CP1/2010 on the Decisions of the 2010 Aviation Appeal Panel Introduction 1. Ryanair welcomes the decision of the Aviation Appeal Panel, issued on 1 st June 2010, in response to its Appeal to refer two specific matters relating to the CAR's Determination CP4/2009 of December 2009 back to the CAR for reconsideration, namely Differential Pricing and the treatment of T1X Incremental Revenues and Remuneration. Ryanair also welcomes the clear recommendation of the Appeal Panel that regulated entity accounts with detailed divisional analysis should be prepared by DAA and that variance analysis be carried out by the Commission for future Determinations. 2. The decisions of the Appeal Panel confirm once again that the actions of the DAA regulated monopoly are bad for competition and bad for consumers, echoing the findings of the UK Competition Commission in respect of the BAA London airports. 3. This response also deals with those additional matters referred back as a consequence of the appeals by Aer Lingus and by the DAA. Treatment by the CAR of Matters Referred Back on Appeal 4. At the outset, Ryanair feels compelled to comment on the CAR s treatment of the appeal process and its willingness to engage with appellants to resolve or clarify its Determinations. 5. The Appeal Panel represents the only avenue which users (or others) have to challenge the technical merits of a Determination. The Appeal Panel is by definition an expert body appointed by the Minister to determine the appeal. The Aviation Regulation Act provides for the Appeal Panel to act as a backstop for genuine regulatory grievances by users. Ryanair does not consider it sufficient or fair for the Commission to simply dismiss the recommendations of the Panel and the concerns of users, as it did last time, without full engagement with the parties and complete transparency of reasoning. 6. Hence, when a matter is referred back on technical grounds, Ryanair does not consider it adequate for the Commission to simply reiterate its past Determination without dealing fully and transparently with issues referred back by the expert Appeal Panel. The lack of information and explanation in CP1/2010 does not facilitate the process and leaves users handicapped by the same lack of information as identified by the Appeal Panel to be the case throughout the regulatory process and to which we refer at the end of this submission. 2

4 7. The 2008 Appeal Panel was critical of the CAR s approach to regulating Dublin Airport, referring to this approach as "passive regulation" 1. Again in 2010, an expert Appeal Panel has found aspects of the CAR s regulation of DAA flawed, notably in the failure to adopt or incentivize differential pricing and in the treatment of the excessive development of areas for retailing without satisfying itself that revenues are genuinely incremental and that users will benefit from the expenditure incurred by the DAA. Ryanair requires full engagement by the CAR with users in the process for resolving these issues. Differential Pricing 8. The Appeal Panel has stated that the CAR should consider how best differential pricing might be initiated. 9. The issue of differential pricing is inextricably linked with the user pays principle which has previously been set out as core regulatory principle by the CAR: In previous determinations, when considering what capital expenditures to include in the regulated asset base (RAB), an underlying principle that has guided the CAR, consistent with its statutory objective, is that user pays : Only those users that actually benefit from a service should pay for it; and The charges users pay should only include the costs of the services that they are currently able to use. 2 The CAR discussed at length in CP1/2007, the desirability of providing users with a choice between terminals offered at differential prices Ryanair has long advocated that there was a need for competing terminals at Dublin Airport to meet the distinct requirements of high fares airlines and low fares airlines, reflecting both the differences in facilities and services required by each and in the willingness and ability to pay. This extended as far as offering to build its own low cost Terminal 2, prior to DAA being mandated to build the new terminal under the Aviation Action Plan. 1 Decision on Ryanair Appeal 2008, paragraph CP1/2007, paragraph Ibid, Section 6. 3

5 11. In CP6/2007, the CAR made clear that it supported the view of Ryanair, and other users, in respect of the desirability of differential pricing being introduced: the Commission agrees with those parties bmi, Ryanair and Forfás that support the principle of differential pricing between terminals and recognized that as might be expected, those airport users who would prefer better facilities favour uniform prices, effectively requiring other users who do not value the improved facilities to pay some of the costs associated with the higher service level. 4 Ryanair made clear that it was willing to pay for facilities that met the reasonable requirements of users but not the over-specified facilities being provided by DAA. 12. The CAR commissioned work from consultants which demonstrated that price differentiation between terminals was possible and becoming increasingly commonplace across Europe. The CAR concluded the Commission believes that allowing airlines more discretion over the price and travel experience that they offer passengers can potentially enhance airline competition. Airlines should not be forced to accept more expensive facilities than they desire merely because a rival argues it cannot compete if airport charges differ. Instead, in this scenario the complaining airline needs to decide whether its passengers would prefer higher charges and better facilities or the lower charges and lesser facilities offered by its rival(s). The DAA should then seek to provide the appropriate mix of facilities, to the extent that this is practical In the 2005 Determination, the CAR made clear that The Commission supported the principle of users being charged different prices for different levels of service. It indicated that the costs of future capital expenditure plans to improve the quality of service in T1 (or T2) would only be included in the RAB if users of the terminal indicated a willingness to pay for the improvements. Where users indicated a preference for lower charges rather than higher service quality, the DAA should seek to meet these requirements. 6 It went onto conclude that The Commission reiterates that it is keen for the DAA to tailor services for users at Dublin Airport so that if different users would prefer different mixes of quality and price, these options should be provided where possible. The building of a second terminal will afford the DAA more opportunity to do this. Airlines should be offered non-discriminatory access to both low-cost and high-cost facilities, when both are available. Plans to spend money upgrading a terminal will need to have the support of users. If T1 users indicate a preference for a lower quality of service and lower airport charges, the Commission will expect the DAA s plans to reflect these preferences. 7 4 CP5/2007, page Ibid, page CP6/2007, page Ibid, page 24. 4

6 14. It is clear from DAA s actions in wasting capital on over-specified facilities in T1 that it has not acted in a manner consistent with those clear principles. Rather, despite objections to the scale of expenditure in T1 by Ryanair and other users, the DAA has abused its dominant position by failing to offer users differentiated services and differentiated prices, consistent with the reasonable requirements of users. 15. In the present case, DAA is bundling basic access to Dublin Airport (a service in which it is dominant by virtue of its monopoly over airport facilities in the Greater Dublin region), together with the provision of high cost/specification facilities at Dublin Airport to meet the alleged requirements of high fares airlines, including those offering long haul flights, a product that the majority of users objected to and do not wish to use. DAA s expenditure on alleged improvements at Dublin Airport that exceed the reasonable requirements of users, combined with its decision to charge all airlines equally for those facilities (even those who opposed the expenditure on the basis that they neither requested nor required the alleged improvements), represents an abuse of its dominant / monopoly position. 16. Ryanair considers that the DAA s recent expenditure on T2, T1X, Pier D and Area 14 at Dublin Airport, combined with its intention to raise the revenue permitted under the CAR price cap, constitute abusive discriminatory conduct whereby the DAA is imposing a bundled package of (a) airport access and (b) high cost/specification infrastructure on Ryanair. The DAA s abusive conduct is exemplified by the higher airport charges that it requires Ryanair to pay. The increase in airport charges represents an increase in the costs to Ryanair of operating flights in to and out of Dublin Airport. This increase in price will clearly harm the consumers, both those that continue to purchase at the higher price and those that choose no longer to purchase or for whom flights are no longer available due to their withdrawal as no longer being profitable. 17. As well as harming consumers and airport users, including Ryanair, the increase in airport charges resulting from the DAA s abusive conduct is also likely to bring about a distortion of competition in the downstream market for air travel. The specification of airport infrastructure and structure of airport charges chosen by the DAA has the effect of benefiting high fares carriers at the expense of low fares carriers such as Ryanair. By imposing the costs of an unnecessarily highly specified terminal on Ryanair, more than Ryanair reasonably requires given its customer profile, the DAA is undermining Ryanair s ability to promote low fares competition and choice for users in the market which it has chosen to target. By contrast, the higher specification/cost terminal facilities put in place by the DAA align directly with the requirements of high fares airlines. 5

7 18. Under the DAA s uniform pricing policy, airlines which do not require such high cost/high specification facilities are disadvantaged by having to bear a substantial share of the associated costs and by having to cross-subsidise the operating costs of rival high fares airlines. Low fare airlines are disadvantaged by facing higher airport charges than would be the case if charges reflected their reasonable requirements, while high fares airlines enjoy a competitive advantage by having the cost of the airport infrastructure that benefits their business subsidised by rivals. Each of these distortions will serve to harm Ryanair, other airlines and their customers that place a lower value on full service airport infrastructure. 19. The requirement to provide users with differentiated terminal services is also a requirement of the Airport Charges Directive 8 at Article 10.2, whereby Member States shall take the necessary measures to allow any airport user wishing to use the tailored services or dedicated terminal or part of a terminal, to have access to these services and terminal or part of a terminal. Whilst this Directive has not yet been incorporated into Irish law, the Government is required to ensure compliance with the Directive by 15 th March 2011, within the period covered by the Determination. 20. Ryanair reiterated the case for low cost terminal facilities to be provided at Dublin in its submission to the CAR in August However, although supporting Ryanair s position ( the Commission supports the principle of differential pricing, allowing users to pay more or less depending on exactly what services they want and the value of those services to them ), the CAR failed to address the substantive issue in the Determination and referred only to the perceived technical difficulties of setting separate price caps Hence, Ryanair was compelled to address its requirement for low cost terminal facilities and differentiated charges to the Appeal Panel. The Panel made clear that it supported Ryanair s case: The Panel is of the view that there is considerable merit in Ryanair s submission for differential pricing. Ryanair is a low cost airline. It operates an internet on-line check in system where the passengers print their boarding passes before leaving for the airport. This means that they need neither boarding desks nor check-in kiosks. The end result is that T1 is capable of dealing with significantly more passengers than it was a few years ago. This potentially contrasts with the services likely to be required by longer haul passengers at whom T2 is largely aimed The Panel went on to say that It is precisely because of Dublin Airport s monopoly position that it should strive to cater for different airline business models. DAA s failure thus far to do so has the possible effect that some business models are favoured over others. This in turn implies a potential restriction or distortion of competition in airline markets which the Panel feels should be addressed by the Commission Directive 2009/12/EC. 9 CP4/2009, paragraph Decision on Ryanair Appeal, paragraph Ibid, paragraph

8 23. Ryanair welcomes the Appeal Panel s confirmation that the failure of the DAA to introduce differential pricing is a potential distortion of competition. Given the statutory objectives of the Commission to facilitate the efficient and economic development and operation of Dublin Airport which meet the requirements of current and prospective users of Dublin Airport, and to protect the reasonable interests of current and prospective users of Dublin Airport in relation to Dublin Airport, it is imperative that the CAR addresses and eliminates this potential distortion by imposing differential pricing to ensure that users are provided with economically efficient choice of facilities and prices. 24. The introduction of differential pricing would not undermine the CAR s third statutory objective in relation to the sustainability and financial viability of Dublin Airport. 25. The Appeal Panel made clear that it would expect differential pricing to be in place from the date when Terminal 2 becomes operational 12. T2 is scheduled to become operational before the end of Ryanair and its passengers are already subsidising the costs of facilities used by high fares airlines since DAA increased its charges to all airport users from 1 st May this year. 26. Further, the Panel has confirmed its belief that the DAA will only introduce differential pricing if it is mandated by the Commission, either in the form of different charge caps for each terminal or alternatively by introducing incentives into the price cap to encourage DAA to employ differential pricing. This view finds confirmation in the position taken by the DAA in recent correspondence with Ryanair, whereby the DAA refused to introduce differential pricing or even to constructively engage with Ryanair on the issue of differential pricing. 13 The Panel suggested that a start could be made with a small nominal difference in the price cap between T1 & T2 once T2 is operational which would establish the principle. Ryanair submits that it is not open to the CAR, in the light of the Appeal Panel s reasoning, to fail to impose differential pricing as an outcome of the present consultation, notwithstanding the identified information requirements to enable it to do so. 27. Ryanair would highlight to the CAR that differential pricing would generate benefits in terms of airport resource allocation. As the CAR has previously identified, if airlines are able to choose between facilities with different combinations of price and quality then the choices that they make will provide a signal to the DAA as to which services and facilities are required by users, and are therefore worth investing in. In the absence of differential pricing, the DAA has to decide on the optimal service level (and cost) without such feedback. Even if the DAA is trying to invest efficiently in users interests (rather than empire building ), it would be better able to make those decisions with empirical information on customers preferred level of service and cost. 28. We now go onto explain how the CAR can derive the differential prices for the two terminals. 12 Ibid, paragraph See attached book of correspondence between Ryanair and the DAA. 7

9 Assessing the Differential Price 29. To determine appropriate differential prices, it is necessary to consider separately the Operating Cost, Commercial Revenues and Capital Costs associated with: T2, That portion of T1 which will either become redundant or which is intended to be allocated for use by users of T2, for example Pier B. That portion of T1 which will continue to be in use (by users of T1). Common Areas (both landside and airside), where costs will not vary depending on whether the user is a T1 or T2 user Airport Charges for users of T1 and for users of T2 respectively, would by calculated by adding together the costs of providing required terminal services and facilities to each (i.e. relevant Capital Costs plus relevant operating cost less relevant commercial revenues) and the costs of providing common services and facilities to each. 31. The costs of providing the required terminal services to users of T2 would be the relevant capital and opex costs, less commercial revenues, associated with T2 and with that portion of T1 that will become redundant and/or which is intended to be allocated for use by users of T2 such as Pier B, divided by the number of passengers using those facilities. 32. The costs of providing the required terminal services to users of T1 would be the relevant capital and opex costs, less commercial revenues, associated with that portion of T1 that is allocated to users of T1, divided by the number of passengers using that facility. 33. The costs of providing common services and facilities to both groups of users would be the relevant capital and opex costs, less commercial revenues, associated with common facilities and services, divided by the total number of passengers using the airport. 34. Since each category of user would be paying the appropriate costs for the relevant services and capital being used by each (consistent with the user pays principle), the net effect on DAA profitability would be neutral: DAA would continue to receive the regulated return on its investment. 35. Using the Opex, Commercial Revenues and Capital costs figures for 2011 that have been used by CAR to determine the price cap for 2011 and using the assumptions and basis of apportionment set out at Annex 1 to allocate costs between users of T1, users of T2 and common areas, Ryanair, has calculated differential prices for the period 2011 to 2014 as set out at Table A hereunder; 8

10 Table A Differential Price Cap Calculation for 2011 (,2009) with no adjustment for T2 unitisation Summary of Building Blocks Total T2 T1 Common ( m,2009) ( m,2009) ( m,2009) ( m,2009) Opex Annex Commercial Revenues Annex Capital Costs Annex Required Revenues Price Cap and Differential Total T2 T1 Common Forecast Pax (mppa) (,2009) (,2009) (,2009) (,2009) Required Revenues per Pax % T2 Revenue per pax 138% T1 Revenue per Pax 75% (,2009) (,2009) (,2009) (,2009) Average Price Cap per CAR 100% T2 Price Cap 138% T1 Price Cap 75% Notwithstanding the significant differential between the price cap for users of T1 and that for users of T2 that is indicated by the calculations summarised at Table A, no adjustment has been made within those calculations to correct for a significant distortion in prices that arises as a result of T2 capital costs being unitised (with returns deferred), while T1 capital costs are calculated on the basis of straight line depreciation with no deferral of returns. 37. The mismatch in the treatment of capital costs between T1 and T2 distorts the differential price cap calculation and needs to be addressed. 38. Ryanair has sought to eliminate the mismatch by assessing what the capital costs of T2 would be if calculated on the basis of conventional straight line depreciation assuming a 40 year asset life consistent with the treatment of T1 capital costs. 39. Using the Opex and Commercial Revenues that have been arrived at on the bases already set out in Annex 1, and using Capital Costs figures for T2 that have been recalculated on a basis that is identical to that used for the calculation of capital costs for T1 as set out at Annex 2, Ryanair has adjusted differential prices for the period 2011 to 2014 as set out at Table B hereunder; 9

11 Table B Differential Price Cap Calculation for 2011 (,2009) with adjustment for T2 unitisation Summary of Building Blocks Total T2 T1 Common ( m,2009) ( m,2009) ( m,2009) ( m,2009) Opex Annex Commercial Revenues Annex Capital Costs Annex Required Revenues Price Cap and Differential Total T1 T2 Common Forecast Pax (million) (,2009) (,2009) (,2009) (,2009) Required Revenues per Pax % T2 Revenue per pax % T1 Revenue per pax 58.84% (,2009) (,2009) (,2009) (,2009) Average Price Cap per CAR 100% T2 Price Cap 162% T1Price Cap 59% On the basis of the assumptions, apportionments and analyses set out above and in the Annexes 1 & 2, the sub-cap for users of T1 should be set at no more that 58% of the price cap allowed by the CAR in CP4/2009 leading to maximum price caps for users of T2 and users of T1 as set out in Table B. 41. In making these calculations, Ryanair has not factored in the implications of other matters referred back by the 2010 Appeal Panel or indeed our ongoing concern at the over-specification and over-spending in relation to the so-called upgrades of T1. Alternative simplified Differential Price Assessment. 42. For the period 2010 to 2014 the T1 only average price cap was calculated by the CAR as 7.79 per passenger. This is the price cap that would apply to all users if T2 does not become operational. It would appear logical that this should represent the absolute maximum price that users who remain in T1 should pay under a differential pricing regime in order to ensure that those users are not penalised as a result of T1 becoming underutilised following the opening of T2 (in disregard to their objections) and the transfer of some other users to that facility. 43. A further alternative simplified Differential Price Assessment is set out at Annex 5 hereto, for the CAR s consideration and assistance. 44. Ryanair considers that the CAR needs to impose differential pricing and does not consider that DAA will respond to mere incentivisation. If the CAR proposes to rely on incentivisation, at the very least there will need to be a further round of consultation on how such incentivisation would work in practice before any final determination. 10

12 45. Ryanair considers that its analysis as set out above demonstrates that the CAR can put itself in a position to calculate a differential price now, and that is should adopt an approach to setting such differential prices in line with the principles set out above. 46. If the CAR determines that it is not in a position to determine differential prices on the basis set out in paragraphs 29 to 41 above, then it should adopt as a ceiling on prices for T1 users, the value which it previously calculated as the relevant cap pending full consultation in an interim review, or follow the alternative methodology presented in Annex 5. 11

13 T1X Incremental Revenues and Remuneration 47. The Appeal Panel has stated that the CAR should carry out an analysis of the extent of incremental revenue attributable to T1X (if any) before allowing the capital expenditure associated with this project into the RAB. 48. The Panel specifically referred to the need to establish the counterfactual position, i.e., what would retail revenues have been in the absence of the investment. 49. Ryanair has always contended that the incremental commercial revenues deriving from T1X must be separately identified and analysed, net of any incremental operational costs incurred in operating and managing the additional area. Only when it can be demonstrated that revenues would not have been earned in any pre-existing retail or catering outlet in the absence of T1X can they be considered as incremental revenues. If it is determined that there are no incremental commercial revenues as a result of T1X, then the Opex costs associated with T1X must also be eliminated from the price cap calculation, in order to ensure compliance with the commitment of the Commission that the project should be charges neutral Ryanair notes that the CAR initially assumed, in the Draft Determination that incremental commercial revenues would be 3.8 million per annum based on the DAA s submission 15. It never attempted to verify these figures, although noting that on this basis the project does not appear to be self financing as it was not covering its capital costs. In the final Determination, a figure of 5 million a year incremental revenues was assumed, without any reasoning or justification given other than in order to balance the capital costs. This does not appear consistent with the position that T1X is not self financing. 51. The CAR assumes in the Determination that retail incomes will grow based on fixed elasticities to passenger growth, with profits from direct retail assumed to grow more slowly and outsourced retail more quickly (presumably to reflect a planned shift between the two categories). The CAR then adds 5 million of additional retail and catering income based on an assumption that revenues being earned in T1X are incremental. Within the CAR s ready reckoner, excluding T1X, retail revenues are projected to decline from 2.62 per passenger in 2010 to 2.58 in 2014 (in 2009 prices). T1X is assumed by the CAR, without any justification or evidence, to add around 0.24 per passenger across the period. 14 CP6/2007, page CP3/2009, paragraph

14 52. The DACC highlighted in its response to the Draft Determination 16 that it was incorrect to consider the extent to which T1X revenues are incremental by reference to the revenues earned in 2009, but that the extent to which they are incremental has to be assessed against the level of revenues per passenger earned prior to the closure of Pier C and the diversion of a proportion of passengers away from retail outlets at the Pier C end of the Street. The calculation is not how much retail income is earned from retail outlets in T1X but whether this income would have been earned from other outlets in the absence of T1X and other redevelopment at the Airport resulting in loss of retail and catering spend by passengers. This gives rise to two material considerations: are passengers buying additional goods or catering products in T1X over and above those they would have purchased any way substitution of buying a burger in one outlet rather than another is not incremental; what income has been lost due to closure of outlets at the Pier C end of the street, and other outlets in the vicinity of Pier A, as well as reduced patronage in others due to diversion of passenger flows away from the some outlets. 53. Figures given in the ready reckoner issued by the CAR with the Draft Determination showed that retail incomes per passenger were 2.89 (at 2009 prices) in 2007, prior to the closure of Pier C, falling to 2.70 in 2008, following closure of the pier in late The CAR gives no explanation as to why it has been willing to accept as its start point in the Determination, a retail revenue per passenger of 2.62 in Even allowing for the assumed incremental revenue from T1X, the retail revenue per passenger never rises above the real figure achieved in 2007 over the period to This demonstrates clearly, even if the CAR s assumed 5 million a year is established to be valid, that T1X does not generate incremental retail revenues over and above those which DAA was earning through pre-existing retail space. On this basis, T1X cannot, following the CAR s own principles, be added to the RAB and, furthermore, the incremental T1X Opex costs must be excluded to ensure the project is cost neutral to users. 54. In summary, Ryanair considers that any commercial revenues being earned in T1X are not incremental by reference to historic levels of retail revenues, prior to development works in T1. Hence, under the CAR s own criteria, as set out in CP5/2007, the cost of T1X cannot be added to the RAB. This is necessary in order to provide regulatory certainty to users. Furthermore, the retail revenues allowed in the price cap determination must, by definition, include those revenues being earned in T1X, even if the requirement for T1X to enter the RAB have not been met in order to ensure that the impact on users is net neutral as compared to the position prior to the development works in T1. A further adjustment is required to Opex to remove the operational costs associated with T1X in order to ensure that the facility is cost neutral as the CAR promised. 16 DACC Response to CP3/2009, paragraph

15 Over-specification of T2 Retail and the consequences for Opex 55. The Appeal Panel has stated that the CAR should consider how recovery of such overheads (relating to the excessive retail areas provided in T2) could be postponed until they are commercially justified. 56. Implicit in the Appeal Panel s decision to refer this specific matter back to the CAR is the acknowledgement, consistent with 2008 Appeal Panel decision that T2 has been constructed to a greater scale than is required for the traffic which is planned to use it. Specifically, this has been attributed by the 2010 Appeal Panel to the provision by DAA of a higher level of retail space than is the norm at European airports for this volume of passenger demand. The Appeal Panel notes 17 that this error is common to T1X. 57. The DACC argued, in response to the Draft Determination, that the operating costs of T2 should not be charged to users in full in so far as these related to the excess floor area which DAA has built and as acknowledged by the CAR in setting part of the capital costs into Box 2. Effectively, the Appeal Panel has indicated this to be the correct approach, specifically in relation to the excess retail areas within the terminal. 58. It is clear that, within the CAR s approach to estimating the commercial revenues to be earned in both terminals, no account is taken for any uplift in relation to the additional areas in T2. Hence, if no incremental revenues are assumed in relation to the additional retail areas, DAA should not be allowed to recover any additional operating costs associated with these areas. This highlights an inconsistency in respect of the treatment of T1X and T2, whereby the CAR proposed an approach which simply assumed a level of incremental commercial revenue per passenger from the provision of additional retail space in T1X but made no matching assumption regarding incremental retail revenue from the substantial additional space in T Ryanair considers that that CAR faces the same problems in assessing the incremental retail revenue per passenger from this additional space in T2 as it currently faces in T1X. Any assumed increase will need to be verified by reference to the amounts historically earned in T1. As with T1X, there can be no case for including an assumption about the potential for DAA to generate incremental retail revenues on a per passenger basis from this space and using such assumed income to net off against the Opex cost implications of the additional space. 17 Paragraph

16 60. Rather the Opex costs in T2 and in relation to T1X have to be reduced pro-rata to the excess floor areas constructed. Ryanair considers that in both T2 and in T1, this will require adjustment to staff costs in relation to Terminals, Maintenance, Cleaning, Airport Management, Commercial and Retail, and to non-staff costs relating to Repairs and Maintenance Costs, Rents and Rates, Energy Costs, Insurance, Cleaning Contracts & Materials, Fees and Professional Services, Marketing & Promotional Costs. Ryanair is not in a position to estimate by how much each of these Opex headings should be reduced as a consequence of the level of redaction in the reports on Opex which accompanied the Draft Determination and Determination. PRM Revenues 61. The Appeal Panel has stated that the CAR should review whether there has been an error resulting in double counting for PRM charges by it being included under both aeronautical revenues and other commercial revenues. 62. DAA has previously argued that under the PRM Regulation 1107/2006, the costs associated with providing the PRM service should be passed through to users outside of the price cap. Ryanair, and other airline users, continue to challenge the basis of the PRM cost which DAA imposes at 0.33 per departing passenger and plans to increase to 0.39 per passenger in In making the Determination, Ryanair notes that the CAR has allowed for the costs of providing the service within Opex at 3.8 million in 2010 rising to 4.4 million in 2014, according to the ready reckoner issued with the Determination. At 0.33 per departing passenger, revenues raised would be 3.22 million in 2010 rising to 3.69 million in To the extent that DAA seeks to pass through the full costs of providing the service, the PRM charge may increase still further. 64. The total amount allowed by the CAR for other commercial revenues in making the Determination was 5.7 million each year. Given the increase in revenues expected from PRM charges, if the CAR has allowed for this income within the other commercial revenue heading, the implication is that revenues from other sources, (including Executive lounges and VIP services, Taxi permit income, US Customs Border Protection income and Income from waste disposal, utility handling charges, communications and cabling charges and identity badge income) will be falling over the life of the Determination. This is not credible given the increase in provision of Executive lounges and US Border protection facilities as a consequence of T2 opening, coupled with expected passenger growth over the period. It is not reasonable to assume that the expected income from these sources would decline from 2.48 million in 2010 to 1.94 million in 2014, as would be implied if PRM revenues were included in this heading even at the current level, without factoring in DAA s planned increase in such charges. 15

17 65. This would suggest that the CAR did not make include PRM income within other commercial revenues in its calculation of the price cap. PRM income must, therefore, be included within the price cap. To the extent that DAA is seeking to charge for this service outside of the cap, the price cap must be adjusted downwards and the CAR must ensure that mechanisms are in place to control any increase in costs to users so as to ensure that DAA is not able to increase charges and double recover within the regulatory period as has occurred in the past with Access to Installation charges relating to check-in desks and kiosks. Overall, Ryanair considers it preferable that such charges for essential facilities or otherwise unavoidable by airlines should be included within the overall price cap to ensure that efficiency incentives apply. Treatment of Inflation in the Reconciliation of CIP The Appeal Panel has stated that the Commission should review and consider the effect of its application of deflation of 6.6% for 2009 to the DAA s submitted figures for reconciliation of project outturn costs for the CIP (which had allowed for an estimated inflation figure of 4% in 2009). 67. Ryanair has reviewed the project outturn costs used by the Commission in its reconciliation of allowed and outturn costs which was set out on an item by item basis in Annex 3 of the Draft Determination CP3/2009, and summarised at paragraph 9.6 of that document. In doing so, Ryanair notes that the purpose of a Regulatory Asset Base is not to ensure that the regulated entity is precisely remunerated for the capital costs it has incurred, whether efficient or not, but to ensure that the regulated entity is remunerated on the efficient costs of facilities required by users, i.e. it is the regulatory value of the assets 18. Fundamentally, it should in part reflect the value users place on those assets and ensure that regulated entity is generating sufficient funds to replace those assets which are valued by users. 68. In response to the Draft Determination, DAA submitted that following an earlier request for information by the Commission, DAA had submitted CAPEX outturn costs for the period on a project by project basis, all of which had been converted by DAA to 2006 priced in order to facilitate reconciliation with the 2006 CIP. When converting its outturns costs from nominal to 2006 prices, DAA indicates that it assumed a 4% increase in CPI for In CP3/2009, the Commission set out its reconciliation of the CAPEX expenditure with the CIP for that period, not in 2006 prices, but in 2009 prices. The DAA claims that, when the Commission was re-inflating the figures from 2006 prices to 2009 prices, it had used the 1% decrease in CPI set out in its draft determination for 2009 rather than the 4% increase that had been assumed by DAA

18 70. In its submissions in response to CP3/2009, the DAA enclosed a schedule setting out the outturn costs and the original CIP Costs on a project by project basis stating that it was making the submission in order to clarify all of the valid project costs for each project in the CIP, DAA has restated its original reconciliation (see schedule at back of this detailed assessment) as follows: Original CIP submission inflated to 2009 prices using CAR s proposed indices (Column A) DAA project outturn costs (excluding Project Management Costs), inflated to 2009 prices using CAR s proposed indices, in order to align both calculations (Column B) 71. DAA included a Restated reconciliation of CIP at pages 11 and 12 of Supporting Document IV of its submissions in response to CP3/2009. It is clear from a review of the data set out on this schedule, that the figures that were used by the Commission were, in the main, precisely the same figures as are set out on the DAA document. 72. Whereas users do not have access to data on each individual CIP item (as a result of redactions of information on the DAA s schedule), it is clear from the analysis set out at Annex 6 to this document that in the cases of 104 Capex projects where users have visibility on outturns, the aggregate outturn stated by the Commission in CP3/2009 amounted to million (in 2009 draft determination prices) whereas the aggregate outturn required by the DAA for these projects amounted to million. It is apparent from a review of the schedule that the vast majority of items matched precisely and the difference of 0.81million arose as a result of small differences in 15 of the 104 projects analysed. 73. If the Commission had erred in the manner suggested by the DAA, each of the project outturns (in 2009 prices) would have been expected to be calculated using an incorrect formula and as a consequence, each would differ form the DAA restated figures. The evidence suggests that the Commission did not err when re-inflating the figures submitted by the DAA and that both the Allowed Capex and the Outturn Capex were correctly expressed in 2009 prices based on the CPI assumptions used by the commission in CP3/ Bearing in mind the change in 2009 CPI assumptions between -1% in the Draft Determination and -6.56% in the Final Determination, two possible course of action were open to the Commission when considering the reconciliation of allowed and actual Capex Outturns; (a) the entire reconciliation could be recast applying the revised indices to both the allowed and actual outturn figures on a line by line basis in order to assess the differences, or (b) the Commission could simply apply the change in CPI to the differences which had been calculated in the draft determination. As is evident from the CPI and Control section of the Commission s spreadsheet model, this latter approach is the one adopted by the Commission. 17

19 75. In summary, the evidence that is visible to Ryanair suggests that Commission has not made a fundamental mathematical error when converting the DAA s CAPEX allowance and CAPEX outturn costs to 2009 prices. The evidence further suggests that the deflation of -6.56% in 2009 has been correctly incorporated by the Commission into its computations relating to the CAPEX reconciliation. If it is the case that issues arise with respect CAPEX outturns for individual projects where costs have been redacted, Ryanair believes that users must be afforded an opportunity to review and consider those costs fully in advance of any adjustment taking place. Disallowance of Pier D costs 76. The Appeal Panel has stated that the Commission should review its disallowance of 15.3 million Pier D over-run costs. 77. It is clear from CP3/ that the Commission considered that, within the cost of capital allowance, the DAA received compensation for the risk of cost overruns on capital projects. The substance of DAA s argument, as set out at of the Appeal Panel s decision on the DAA appeal, is that, notwithstanding the Commission s position, there was no evidence of any specific change to the DAA cost of capital allowance on foot of this decision. Ryanair had made a substantially similar argument to the Appeal Panel regarding the visibility of individual elements or constituents in the cost of capital calculation. 78. The Appeal Panel at and of its decision on Ryanair s appeal, with respect to such individual constituent parts of the Cost of capital allowance, stated; The difficult task for the Panel is that there are a series of individual calculations involved in the cost of capital. It requires the exercise of judgment on a whole range of detailed issues. It is not, in the Panel s view, appropriate to cherry pick one aspect, even if it is significant component, and seek to vary it without looking at the whole. This is especially so when the Panel is being asked to assess one component in the abstract. In the absence of information that suggests that the Commission s determination on this issue clearly falls outside the reasonable scale of this kind of debt the Panel is not inclined to refer matters back to the commission for review. Even if such information were available, the issue would then have to be considered in the context of the overall cost of capital estimation, as a less generous view taken by the Commission on one component may be counterbalanced by a more generous view on another component 19 Paragraph

20 79. Ryanair contends that Appeal Panel s response in relation to Ryanair s argument regarding individual constituents of the cost of capital should be applied equally to the DAA s similar argument regarding the allowance for risk of overspend within the Commission s cost of capital allowance. In other words, the risk of cost over-runs on development projects are already captured in the cost of capital allowance as this reflects the general risk attaching to capital development at airports. 80. It is clear that the Pier D allowance for the period, which was determined by the Commission in the 2005 Determination and remained unchanged in the 2007 Interim Review, amounted to 93.4m in 2009 prices. The disallowed expenditure relates to an overspend. The Commission has explicitly stated that the DAA receives compensation for the risks of overspending within either the contingency allowance or the cost of capital allowance. Since DAA has already been compensated for such risks, any adjustment to the disallowance would amount to a duplication of charges to users and compensation to the DAA. In circumstances where the DAA has been compensated for the risk of cost overruns, it follows that the markets have no reason to react negatively or to view the disallowed cost overruns in a negative light. 81. Whilst the Commission refers to Aer Lingus s submission in relation to cost over-runs at paragraph 8.18 of the Determination 20, there is another important principle of regulatory certainty in relation to the treatment of such cost over-runs where the scope of the project has changed, as is clearly the case here. In order to allow any additional costs, the Commission has to satisfy itself that the additional expenditure has been efficiently incurred and meets the reasonable requirements of users. This principle was set out in CP6/ and was evident at the time when the cost of capital allowance was set. In other words, the financial markets would have been aware of the risks attaching to development undertaken by DAA without the agreement of its users. 82. In deciding how much of the additional Pier D expenditure to allow, the Commission stated clearly that it had not been convinced that the DAA consulted with users and established that they supported the additional work given its associated costs. 22 Hence, it is clear that the CAR considered the issues in the round in deciding how much of the cost over-run to allow and what to disallow. Regulatory certainty to users dictates that the CAR was correct in disallowing certain costs in line with its own regulatory principles. This, by definition, cannot give rise to any additional regulatory risk impacting on cost of capital. Disallowance of Pier D Fit out and TFL costs 83. The Appeal Panel has stated that the Commission should review its disallowance of Temporary Forward Lounge and Pier D fit out costs. 20 CP4/ Page CP4/2009, paragraph

21 84. The DAA argued that the 124.9m referred to by the Commission at 8.20 of the Determination as representing the reported outturn capex amount for Pier D does not include TFL costs incurred of 6.2m and Pier D Fit Out costs incurred of 1.2m. The Commission has indicated that the 124.9m fully accounts for the outturn costs of the TFL and Pier D Fit out projects. The 124.9m figure referred to by the Commission at the Table 9.2 of the Draft Determination 23 which purported to show DAA s breakdown of Pier D outturn costs, as set out in Appendix D to the DAA response to the October 2008 Issues Paper (published on the Commission s website) and that the Commission has netted 7.6m from figures to account for remuneration received by the DAA for its Pier D investment prior to The DAA s restated reconciliation of Capex outturns , set out at Page 11and 12 of Supporting Document IV of its Submissions in response to the Draft Determination, gives the following information with respect to Pier D Outturn costs for the relevant projects: Table C Extracts from DAA submission on CP3/ Supporting Document IV DAA Outturn costs Inflated to 09 (Draft) prices using CAR methodology CIP7.012 Pier D CIP7.020 Temporary Forward Lounge 6.49 CIP4.019 Pier D Tenant Fit out Projects CP3/2009 [9.14] PierD Capex Remunerated Pre 06 (7.60) When the adjustment for remuneration that the DAA had received for the project prior to 2006 in the amount of 7.6m (expressed in 2009 prices 24 ) is deducted from the DAA s aggregate outturn figures for the three projects in the amount of (expressed in 2009 Draft prices), it can be seen that the relevant outturn figure is This would suggest that outturn figures used by the Commission as set out at Table 9.2 of the Draft Determination in the amount of does not exclude CIP7.020 (Temporary Forward Lounge) and CIP4.019 (Pier D Tenant fit-out projects) as has been claimed by the DAA. The above evidence suggests that the outturn expenditures related to the two projects have not been disallowed by the Commission but have been fully taken into account in its reconciliation and analysis. As a consequence, no adjustment is required or should be made. 23 CP3/ CP3/2009, paragraph

22 Regulated Entity Accounts and Accounting Practices 87. Although not matters expressly referred back for immediate reconsideration by the CAR, the Appeal Panel made clear that it strongly recommended that regulated entity accounts with detailed divisional analysis should be prepared by the DAA, and that variance analysis be carried out by the Commission for future determinations. In arriving at its conclusion, the Appeal Panel indicated that; A cursory analysis of the regulated entity accounts without a more detailed consideration of the cost allocation process.is...difficult to justify the DAA should produce divisional financial accounting information in any way that may be required (retail/regulated/other) including a separate analysis for T1 & T2 by merely using the information contained in the regulated entity accounts prepared by the DAA to estimate the return on the RAB the Commission is not doing enough to satisfy itself that there is no cross subsidization between the regulated and commercial activities of the DAA. The absence of detailed accounting information creates suspicion and confusion amongst users and may lead to protracted procedures in finalizing determinations 88. Ryanair calls on the Commission to act now in order to ensure that adequate and appropriate information is produced, audited and made available throughout the current regulatory period to enable users to consult more fully and properly on any future decisions. 89. It is be crucial that sufficient accurate accounting information be available both to the Commission and to users to enable the profit/loss performance of each division and subdivision of regulated entity to be separately viewed and analysed in order that decisions can be properly grounded and delivered more readily. 21